Mumbai: India’s top venture capital funds are still looking for successful exits that are proving elusive in a rapidly transforming start-up ecosystem.

At a panel discussion on Venturenomics 2.0: Mapping the Venture Space, the heads of India’s largest venture funds spoke of the challenges of walking their portfolio companies through their life cycle—from early stage to a profitable exit for themselves.

The panel discussion was part of Mint’s first private equity conclave, held in Mumbai.

“There are always periods of depression and mania in the Indian venture space, most years are abnormal," said Avnish Bajaj, founder and managing director of Matrix Partners India. “This is why venture investing is hard. You need this periodic flushing out of the system for the best disruption to happen."

A pressing question with India’s start-ups, particularly those that operate in the consumer internet space, has been their rapidly rising valuations. However, recent cuts in the valuations of India’s largest unicorns, particularly e-commerce giant Flipkart, has led people to question how investors put a value to their portfolio companies. Unicorns are start-ups valued at $1 billion or more.

“The No. 1 kind of sanity we’re seeing now is people asking ‘how will you make money?’, said Anand Prasanna, managing partner at Iron Pillar.

Avendus Capital director Karan Sharma said valuations had been changing rapidly because companies are now being tested on entirely new metrics.

“We’ve seen the move from GMV to revenue, to contribution margins," he said. “And now (we see valuations on) forward Ebitda multiples."

GMV is short for gross merchandise value, a much-hyped e-commerce metric that refers to the value of goods sold on an e-commerce site but does not account for discounts or product returns. Ebitda is short for earnings before interest, tax, depreciation and amortization, an indicator of operating profitability.

This has changed the way investors see the importance of a sustainable business model, although standing by the need to allow early-stage entrepreneurs to not focus on profits when they start out.

“It is unfair to add profitability to an early-stage company because that’s not what they’re about," said Nupur Garg, South Asia regional lead at International Finance Corporation (IFC), the World Bank’s private equity arm.

“All businesses need to make cash, but the peculiar thing about tech is that the growth potential is not easily measurable or forecastable. So that’s why tech valuations change," she added.

The panellists, who ranged from executives of early-stage to large-ticket funds, all agreed that contrary to popular opinion, there was not enough capital in the market.

“I believe there is a major gap in mid-stage and late-stage investment," said Iron Pillar’s Prasanna. “Late-stage investors (in India) typically come from outside India."

Indian unicorns have sparked a debate by demanding government protection from “capital dumping" that is fuelling competition in their markets.

In December last year, Ola founder Bhavish Aggarwal and Flipkart co-founders Sachin Bansal and Binny Bansal made public appeals to the Indian government to protect Indian entities like them from foreign rivals whose business models they have introduced in India.

“There are always models that are profitable, but if there are just two competitors running each other down, that’s not good," said Prashanth Prakash, partner at Accel Partners India.

“Flipkart, Ola, are losing money because of hyper-competition," Matrix Partners’s Bajaj added. “They would all have been making money if they weren’t competing with global companies."

Matrix Partners invested in the Series B and C fund-raising rounds of ride-hailing app Ola.

Accel Partners’ Prakash pointed out that vertical focus is gaining traction among successful start-ups in the country. “It is very possible for enterprise and SaaS (Software as a Service) companies to emerge from India and (do an) IPO," he said. IPO is short for initial public offering.

“It is very similar in healthcare, and in B2B (business-to-business), where a person who is used to using a platform like Flipkart can also use it as a vendor in a supply chain," Prakash added.

“There is a company that has built an entire platform for $1 million and is selling it in the US, where companies would have made the same thing in $15-20 million", he said. “There will be innovation coming out of here at much lower investment levels."

“Everyone who comes to India is looking for the next Alibaba," Prasanna said. “No one is looking for the next Cisco or the next SAP. They forget that it took Baidu, Tencent, and Alibaba 15 years to reach where they are."